FBR Downgrades Moody's, Sees Reasons To Be Cautious

• Shares of Moody's Corporation MCO have declined 12.91 percent over the past three months, from a high of $111.80 on August 5.
• William Bird of FBR & Co. has downgraded the rating on the company from Outperform to Market Perform, while lowering the price target from $100 to $123.
• Bird expects the stock’s outperformance to moderate, given the slow start to Q4, tough comps expected for Q1 and the possibility that this could be the late stage of a “benign credit cycle.”

“We remain strong believers in MCO’s long-term growth prospects and its top shelf management team, but we see some reasons to be cautious in the near term,” William Bird stated.

Since the company’s last analyst day on September 30, there has been an obvious decline in forward comments regarding Moody’s new issue pipeline. Bird believes that the slow start to Q4 validates this weakness, given that high-yield issuance for October was down 64 percent, with leveraged loan issuance declining 32 percent.

According to the FBR report, “Slow 4Q issuance conditions and a tough 13.8 percent 1Q revenue comp could challenge near-term growth momentum.”

Bird also expressed concern that with benign credit periods usually lasting for about seven years and the current cycle being close to the end of its sixth year, there appear to be signs of credit deterioration, although the conditions still remain healthy.

In addition, there could be rerating risk to the stock, with the company’s EPS growth having begun to moderate in 2014, a trend that has continued in 2015.

“Lumpy revenue recognition for Moody’s Analytics enterprise risk solutions business, coupled with difficult comps, means that MA is likely to experience a mid-single-digit revenue decline in 4Q,” the report added.

“This is important because MA has served as important ballast in helping stabilize revenue growth when ratings has been weak, but this will not likely be the case in 4Q,” Bird explained.